On April 21, 2008, the Committee on Foreign Investment in the United States (CFIUS) issued proposed regulations governing national security reviews of foreign investments in U.S. businesses. These new regulations were issued to implement amendments adopted by the Foreign Investment and National Security Act of 2007 (FINSA) to the Exon-Florio Amendment to the Defense Production Act of 1950. FINSA became effective on October 24, 2007, and the proposed regulations address changes to the law legislated by FINSA and codify certain existing CFIUS administrative practices.
FINSA permits the President of the United States to block acquisitions, mergers, or takeovers of U.S. companies or assets by foreign-owned or foreign-controlled entities when, in the President’s view, such transactions threaten the national security of the United States. Parties to a transaction subject to FINSA (referred to in the proposed regulations as a “covered transaction”) may voluntarily file a notification with CFIUS to give the U.S. Government an opportunity to review the transaction and address any potential national security concerns. CFIUS is an interagency committee chaired by the Secretary of the Treasury and composed of various representatives of the executive branch of the U.S. Government, including the Attorney General and the Secretaries of Homeland Security, Commerce, Defense, State, and Energy. The Director of National Intelligence and the Secretary of Labor serve as ex officio members of CFIUS.
FINSA provides for a 30-day CFIUS review of a covered transaction to determine the effect of the transaction on national security, and to address any threat posed by such transaction. CFIUS designates a “lead agency” to conduct the review (however, each CFIUS member is involved). The CFIUS review can be extended into an additional 45-day investigation in cases where the transaction:
• threatens to impair national security and that threat has not been mitigated prior to the conclusion of the initial 30-day CFIUS review;
• involves a foreign government-controlled acquiring entity;
or
• could result in foreign control over critical infrastructure.
In addition, an extended investigation can be undertaken at the recommendation of the lead agency and with the concurrence of the other CFIUS members.
To address congressional concern over appropriate accountability for CFIUS decisions, FINSA requires that a high-level official of the Department of the Treasury and the lead agency certify to Congress that there are no unresolved national security issues. For example, for transactions involving foreign government ownership or critical infrastructure, the Deputy Secretaries of the Treasury and the lead agency must certify that the transaction does not threaten national security in order for the transaction to be cleared within the initial 30-day review. If a 45-day investigation is initiated and any national security concerns remain unresolved at the end of such investigation, the transaction must be referred to the President, who then must make a determination within 15 days on whether to approve or block the transaction.
The proposed regulations deal primarily with the administrative aspects of CFIUS reviews and investigations, such as personal identifier information for the directors and senior managers of the foreign acquiring entity and organizational charts showing the relationship between the foreign acquiring entity and its parent and affiliated entities.
The proposed regulations retain many of the key provisions of the current regulations, while clarifying certain concepts, and include numerous examples to further clarify the scope and applicability of key concepts. This is welcome as it makes it easier for companies – especially small companies with limited resources – to comply with the regulations.
Nevertheless, it is worth repeating that we should not allow overzealous politicians to use the precedent set by FINSA to try to revise the CFIUS process whenever doing so allows them to score easy points with their constituents.
Americans’ fears about terrorist activities and an economic playing field that is unbalanced against American workers should not be manipulated to justify continuous review and revision of the process CFIUS uses to judge the level of danger posed by FDI deals. Doing so would lead to an insecure investment climate, scaring off foreign firms willing to put capital into the American economy – and scaring off foreign companies willing to put money into our economy is the last thing we ought to do in times of a credit crisis.